GUIDELINES ON LIQUIDITY MONITORING TOOLS (LMT)

Guidelines on Management of Credit Concentration RiskSEPTEMBER 2021
3.1. Assumptions Underlying Contractual Cash Flows ......................................... 3
3.2 Utilization of the Metric. ................................................................................. 4
4. Concentration of Funding ................................................................................. 5
4.1 Calculation of the Metric ................................................................................ 5
4.2 Utilization of the Metric .................................................................................. 6
5. Available Unencumbered Assets ..................................................................... 7
5.1 Calculation of the Metric ................................................................................ 7
5.2 Utilization of the Metric .................................................................................. 8
6. LCR by Significant Currency ............................................................................ 8
7. Market-related Monitoring Tools ...................................................................... 9
7.1 Definition and Practical Application of the Metric .......................................... 9
7.2 Utilization of the Metric/Data ......................................................................... 9
8. Appendix 1 – Reporting Templates ................................................................ 11
8.1 Contractual Maturity Mismatch .................................................................... 11
8.2 Concentration of Funding ............................................................................ 12
8.3 Unencumbered Assets ................................................................................ 14
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1. Introduction
1. The Central Bank of Nigeria (CBN) Guidelines on Liquidity Coverage Ratio (LCR)
is aimed at ensuring that banks hold sufficient unencumbered high-quality liquid
assets (HQLA) to survive a 30-day stress period. The LCR requirements assume
that 30 days is enough time for the bank’s management and the CBN to take
corrective action or resolve the bank in an orderly way.
2. It is essential that banks deploy appropriate tools to monitor their liquidity
position on a regular basis given the uncertainty around timing of outflows
and inflows which could result in potential mismatches within the 30-day
period and hence the need to hold sufficient HQLA to bridge any cash flow
gaps that could ensue.
3. The Basel Committee on Banking Supervision (BCBS)1 specifies five additional
tools and metrics for monitoring of banks’ liquidity risk. These metrics capture
specific information relating to a bank’s cash flows, balance sheet structure,
available unencumbered collateral, and certain market indicators. The metrics are
expected to help supervisors in the ongoing assessment of the liquidity risk profile
of banks in their jurisdictions.
4. The CBN will monitor the trends in individual bank’s liquidity risk metrics and will
take appropriate action when:
a) potential liquidity difficulties are signalled through a negative trend in the
metrics;
b) a deteriorating liquidity position is identified; or
c) the absolute result of the metric identifies a current or potential liquidity problem
5. The five monitoring tools (metrics) specified by BCBS are:
a) Contractual maturity mismatch;
b) Concentration of funding;
c) Available unencumbered assets;
e) Market-related monitoring tools.
1 Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, January 2013
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2. Frequency of Reporting
6. A Reporting bank is required to report to the CBN on a monthly basis, not later than
5 days after the last day of each month on each of the metrics as tabulated below.
Table 1: Frequency of Reporting
Metric Reporting
Frequency Implementation
Market-related monitoring tools. Monthly
3. Contractual Maturity Mismatch
7. The contractual maturity mismatch profile identifies the gaps between the
contractual inflows and outflows of liquidity for defined time bands. These maturity
gaps indicate how much liquidity a reporting bank would potentially need to raise
in each of these time bands if all outflows occurred at the earliest possible date.
This metric provides insight into the extent to which the reporting bank relies on
maturity transformation under its current contracts.
8. A reporting bank should report contractual cash and security flows in the relevant
time bands based on their residual contractual maturity. This is achieved by
mapping contractual cash and security inflows from all on-and off- balance sheet
items to defined bands based on their respective maturities.
9. A reporting bank should report instruments that have no specific maturity (non-
defined or open maturity) separately, with details on the instruments and with no
assumptions applied as to when maturity occurs. Reporting banks should also
include information on possible cash flows arising from derivatives such as interest
rate swaps and options to the extent that their contractual maturities are relevant
to the understanding of the cash flow.
10. The data a reporting bank collects from the contractual maturity mismatch should
be aligned with the categories outlined in the Guidelines on LCR.
3.1. Assumptions Underlying Contractual Cash Flows
11. A reporting bank should ensure that:
a) No rollover of existing liabilities is assumed to take place. For assets, the
reporting bank is assumed not to enter any new contracts.
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b) Contingent liability exposures that would require a change in the state of the
world (such as contracts with triggers based on a change in prices of financial
instruments or a downgrade in the bank's credit rating) is detailed, grouped by
what would trigger the liability, with the respective exposures clearly identified.
c) All securities flows are recorded. This will allow the CBN to monitor movements
in securities that mirror corresponding cash flows as well as the contractual
maturity of collateral swaps and any uncollateralised stock lending/borrowing
where stock movements occur without any corresponding cash flows.
d) It reports separately the customer collateral received that the reporting bank is
permitted to rehypothecate as well as the amount of such collateral that is
rehypothecated at each reporting date. This will also highlight instances when
the bank is generating mismatches in the borrowing and lending of customer
collateral.
3.2 Utilization of the Metric
12. Given that the metric is based solely on contractual maturities with no behavioural
assumptions, the reporting bank’s data will not reflect actual future forecasted flows
under the bank’s current, or future strategy or plans, i.e., under a going-concern
view. Also, the contractual maturity mismatches do not capture outflows that a
reporting bank may make in order to protect its franchise, even where contractually
there is no obligation to do so. Contractual data provided by reporting banks will
enable the CBN to build a market-wide view on liquidity and identify market outliers.
13. Reporting banks should also:
a) Conduct their own maturity mismatch analyses, based on going-concern
behavioural assumptions of the inflows and outflows of funds in both normal
situations and under stress;
b) Ensure that the analyses of maturity mismatches are based on strategic and
business plans and are shared and discussed with the CBN and the data
provided in the contractual maturity mismatch should be utilized as a basis of
comparison;
c) Be able to demonstrate the appropriateness of the assumptions underpinning
their projected mismatches and should ensure that such assumptions are
adequately conservative (prudent);
d) Articulate how it plans to bridge any identified gaps in its internally generated
maturity mismatches; and
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e) Justify any differences between the assumptions applied and the underlying
contractual terms.
14. The CBN will, as part of its supervisory review process, challenge the reporting
bank’s assumptions, its approach to bridging any maturity mismatches, and assess
the feasibility of its funding plans under different stress scenarios.
15. The CBN will also require banks to submit projected mismatch reports as part of
an assessment of impact of any material changes to their business models as a
result of potential major acquisitions or mergers or the launch of new products that
have not yet been contractually entered into.
4. Concentration of Funding
16. This metric is meant to identify those sources of wholesale funding that are of such
significance that their withdrawal could trigger liquidity problems. The metric
encourages the diversification of funding sources.
17. Definition and practical application of the metric
A. Funding liabilities sourced from each significant counterparty as a % of total
liabilities;
B. Funding liabilities sourced from each significant product/instrument as a % of
total liabilities
C. List of asset and liability amounts by significant currency
4.1 Calculation of the Metric
18. The numerator for A and B is determined by examining funding concentrations by
counterparty or type of instrument/product. Banks should monitor both the absolute
percentage of the funding exposure, as well as significant increases in
concentrations.
19. The numerator for counterparties should be calculated by aggregating the total of
all types of liabilities to a single counterparty or group of connected or affiliated
counterparties, as well as all other direct borrowings, both secured and unsecured,
which the reporting bank can determine arise from the same counterparty (such as
for overnight commercial paper / certificate of deposit funding).
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20. A significant counterparty is defined as a single counterparty or group of
connected or affiliated counterparties accounting in aggregate for more than 1% of
the reporting bank's total balance sheet. A group of connected counterparties shall
be defined in the same way as in the CBN Guidelines on Large Exposures.
21. Intra-group deposits and deposits from related parties should be identified
specifically under this metric, regardless of whether the metric is being calculated
at a legal entity or group level, due to the potential limitations to intra-group
transactions in stressed conditions.
22. The numerator for type of instrument or product should be calculated for each
individually significant funding instrument or product, as well as by calculating
groups of similar types of instruments or products.
23. A significant instrument or product is defined as a single instrument or product
or group of similar instruments or products that in aggregate amount to more than
1% of the reporting bank's total balance sheet.
24. In order to capture the amount of structural currency mismatch in a bank’s assets
and liabilities, reporting banks are required to provide a list of the amount of assets
and liabilities in each significant currency.
25. A currency is considered significant if the aggregate liabilities denominated in that
currency amount to 5% or more of the bank's total liabilities.
26. The above metrics should be reported separately for the time horizons of less than
one month, 1-3 months, 3-6 months, 6-12 months, and for longer than 12 months.
27. In utilizing this metric to determine the extent of funding concentration to a certain
counterparty, the reporting bank must recognize that currently it is not possible to
identify the actual funding counterparty for many types of debt.
28. The actual concentration of funding sources, therefore, could likely be higher than
this metric indicates. The list of significant counterparties could change frequently,
particularly during a crisis. The CBN will consider the potential for herding behavior
on the part of funding counterparties in the case of an institution-specific problem.
In addition, under market-wide stress, multiple funding counterparties and the
reporting bank itself may experience concurrent liquidity pressures, making it
difficult to sustain funding, even if sources appear well diversified.
29. In interpreting this metric, one must recognize that the existence of bilateral funding
transactions may affect the strength of commercial ties and the amount of the net
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outflow e.g., where the reporting bank also extends funding or has large unused
credit lines outstanding to the significant counterparty.
30. These metrics do not indicate how difficult it would be to replace funding from any
given source.
31. To capture potential foreign exchange risks, the comparison of the amount of
assets and liabilities by currency will provide the CBN with a baseline for
discussions with the banks about how they manage any currency mismatches
through swaps, forwards, etc. It is meant to provide a base for further discussions
with the bank rather than to provide a snapshot view of the potential risk.
5. Available Unencumbered Assets
5.1 Calculation of the Metric
32. The metrics on a reporting bank’s available unencumbered assets will provide the
CBN with data on the quantity and key characteristics, including currency
denomination and location, of those assets. Available unencumbered assets have
the potential to be used as collateral to raise additional HQLA or secured funding
in secondary markets or are eligible at the central bank’s standing facilities and as
such may potentially be additional sources of liquidity for the bank.
33. A reporting bank is to report the amount, type and location of available
unencumbered assets that could serve as collateral for secured borrowing in
secondary markets at prearranged or current haircuts at reasonable costs.
34. For assets to be counted in this metric, a reporting bank must have already put in
place the operational procedures that would be needed to monetise the collateral.
35. A reporting bank should report separately the customer collateral received that the
bank is permitted to deliver or re-pledge, as well as the part of such collateral that
it is delivering or re-pledging at each reporting date.
36. In addition to providing the total amounts available, a reporting bank should report
these items categorised by significant currency. A currency is considered
‘significant’ if the aggregate stock of available unencumbered collateral
denominated in that currency amounts 5% or more of the associated total amount
of available unencumbered collateral (for secondary markets or central bank).
37. A reporting bank must report the estimated haircut that the secondary market or
central bank would require for each asset. In the case of the latter, a reporting bank
would be expected to reference, under business as usual, the haircut required by
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the central bank that it would normally access (which likely involves matching
funding currency).
38. As a second step after reporting the relevant haircuts, a reporting bank should
report the expected monetised value of the collateral (rather than the notional
amount) and where the assets are actually held, in terms of the location of the
assets and what business lines have access to those assets.
39. Reporting banks are required to report their available unencumbered assets
on a monthly basis within 5 working day after the end of the month.
40. These metrics are useful for examining the potential for a bank to generate an
additional source of HQLA or secured funding. They will provide a standardised
measure of the extent to which the LCR can be quickly replenished after a liquidity
shock either via raising funds in private markets or utilising central bank standing
facilities.
41. The metrics do not capture potential changes in counterparties’ haircuts and
lending policies that could occur under either a systemic or idiosyncratic event and
could provide false comfort that the estimated monetised value of available
unencumbered collateral is greater than it would be when it is most needed.
6. LCR by Significant Currency
42. While the LCR is required to be met in one single currency, in order to better
capture potential currency mismatches, reporting banks should also monitor the
LCR in significant currencies. This will allow the reporting banks to track potential
currency mismatch issues that could arise.
Foreign Currency LCR = Stock of HQLA in each significant currency /
Total net cash outflows over a 30-day time period in each significant
currency2
43. The definition of the stock of high-quality foreign exchange assets and total net
foreign exchange cash outflows should mirror those of the LCR for common
currencies3.
2 Amount of total net foreign exchange cash outflows should be net of foreign exchange hedges 3 Cash flows from assets, liabilities and off-balance sheet items will be computed in the currency that the
counterparties are obliged to deliver to settle the contract, independent of the currency to which the
contract is indexed (or "linked"), or the currency whose fluctuation it is intended to hedge
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44. A currency is considered “significant” if the aggregate liabilities denominated in that
currency amount to 5% or more of the bank's total liabilities.
45. Reporting banks are required to submit their LCR by significant currency on
monthly frequency to the CBN along with the main LCR return.
7. Market-related Monitoring Tools
46. This metric includes high frequency market data that can be used as early warning
indicators in monitoring potential liquidity difficulties at banks.
7.1 Definition and Practical Application of the Metric
47. The CBN shall monitor the market data on the following levels to focus on potential
liquidity difficulties:
a) Market-wide information: These include but are not limited to, equity prices4
debt markets5; foreign exchange markets, commodities markets, and indices
related to specific products, such as for certain securitised products.
b) Information on the financial sector: These include equity and debt market
information for the financial sector broadly and for specific subsets of the
financial sector, including indices.
c) Bank-specific information: These include information on equity prices, CDS
spreads, money-market trading prices, the situation of roll-overs and prices for
various lengths of funding, the price/yield of bank debenture or subordinated
debt in the secondary market.
7.2 Utilization of the Metric/Data
48. Reporting bank should, where applicable, ensure that Information such as equity
prices and credit spreads are readily available. However, the accurate
interpretation of such information is important6. Also, when considering the liquidity
impact of changes in certain data points, the reaction of other market participants
to such information can be different, as various liquidity providers may emphasise
different types of data.
4 Overall stock markets and sub-indices in various jurisdictions relevant to the activities of the supervised
banks 5 Money markets, medium-term notes, long term debt, derivatives, government bond markets, credit
default spread indices, etc. 6 For instance, the same CDS spread in numerical terms may not necessarily imply the same risk across
markets due to market-specific conditions such as low market liquidity
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49. To address this metric, bank specific information7 shall be submitted not later than
5 working days after the last day of each month in the prescribed format as set out
in Section 8.5 of Appendix 1.
7 Other information on Liquidity
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8.1 Contractual Maturity Mismatch
Table 1: Reporting Template for Contractual Cash Flow Mismatch All amounts to be rounded off to the nearest N'000
Contractual Balance Sheet Mismatch
8 to 14 days
15 days to 1
Non contract ual
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Contractual maturity of assets (items 2 to 4)
1
3
5
Other liabilities 9
10
11
12
13
14
16
12
Table 2: Information on Investments and Items with No Contractual Maturity
Name of Instrument/investments/Item without contractual maturity
Amount (N’000)
Total
Customer collateral which can be re-hypothecated
Name of Instrument
Amount (N’000) Available
A B C = (A-B) Instrument 1 Instrument 2 Instrument 3 ………… ………… ………… ………… Instrument n Total
8.2 Concentration of Funding
Name of Significant counterparty
Percentage of Total Liabilities
Intragroup or related parties (Yes or No) to be marked
1 2 3 Yes No
Significant counterparty 1 Yes No
………… Yes No
………… Yes No
………… Yes No
Total
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Name of Significant Instrument or Groups of Similar Instruments
Amount (N’000) Percentage of Total Liabilities
1 2 3
Significant instrument/product 1
Table 6: List of Assets and Liabilities by Significant Currencies
Name of Significant
Percentage of Total Liabilities
Significant currency 1
Table 7: Time Buckets of Maturity of Exposures
All amounts to be rounded off to the nearest N'000 Item
Months Total
A. Funding from Significant Counterparties
Significant counterparty 1
Significant counterparty 2
Significant instrument 1
Significant instrument 2
All amounts to be rounded off to the nearest N'000
Concentration of deposit funding
1 to 2 months
2 to 3 months
3 to 6 months
6 to 12 months
Funding supplied by associates of the reporting bank
Ten largest depositors Ten largest financial institutions funding balances
Ten largest government and parastatals funding balances
Negotiable paper funding instruments
of which: issued for a period not exceeding twelve months
of which: issued for a period exceeding five years
8.3 Unencumbered Assets
S/No. Description Asset Type & Nature
Location
Estimated Haircut (%)8
Expected Monetized Value of Collateral
A. Available unencumbered assets that are marketable as collateral in secondary market
1
2
3
n
Total
B. Available unencumbered assets that are eligible for central banks’ standing facilities
1
2
3
n
Total
C. By Significant Currency – Available unencumbered assets that are marketable as collateral in secondary markets or eligible for central banks’ standing facilities
Naira
1
2
3
15
Location
Estimated Haircut (%)8
3
Collateral received by the reporting bank
Fair value of collateral received, or own debt securities issued available for encumbrance
Nominal of collateral received, or own debt
securities issued but not available for
encumbrance Total
group
Total Assets, Collateral Received and Own Debt Securities Issued
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Line No.
assets
Assets of the reporting institution (item 2 to 9)
1
8
Other assets 9
8.4 LCR by Significant Currency Table 12: LCR by Significant Currency
LCR by Significant Currency
Values in Naira (N'000)
Liquidity Coverage Ratio (LCR) (A/B*100) % % % % % %
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8.5 Market Related Monitoring Tools
Table 13: Movement in Equity Prices9 All prices should be reported in Naira
Entity Name
Par Value
Highest Price during the month with date
Lowest Price during the month with date
Price on the last trading
day of the month
Type of Instrument Amount Outstanding
Face Value Date of Issue
Date of Maturity
month
1
2
3
Table 15: Penalties imposed in respect of Breach of Liquidity Requirements on Overseas Operations including subsidiaries
Name of Branch/ Subsidiary along with
Jurisdiction
foreign currency) Date of Breach
Amount of Breach (in foreign currency)
Action initiated by the Bank
1
2
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GUIDELINES ON LIQUIDITY MONITORING TOOLS (LMT)